The Single-Payer Solution

Harvard professor William Hsiao brings Taiwan’s health-care system to Vermont.

John is a Governing correspondent covering health care, public safety and urban affairs.

Economist William Hsiao is one of the most interesting figures in health care. In 1988, the government of Taiwan asked the Harvard School of Public Health professor to lead an effort to overhaul the country's health-care system. The success of the single-payer system Hsiao designed attracted the notice of health reformers in Vermont, who persuaded then-Senate President Pro Tempore Peter Shumlin to make a similar system a centerpiece of his gubernatorial campaign. When Shumlin won, he asked Hsiao to develop a variant for the Green Mountain State.

This week, Gov. Shumlin will sign legislation into law that that will set Vermont on a course to become the first state in the country to adopt a single-payer system. I recently caught up with Hsiao to talk about what U.S. policymakers could learn from international health reform efforts and why Vermont is going beyond the Affordable Care Act (ACA). An edited transcript follows.

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Fifty-three percent of the population lacked insurance. The government wanted to have universal health insurance coverage and they wanted health care to be affordable, which meant that you had to be able to manage health care cost inflation. It's very similar to the problem that the U.S. is wrestling with right now, except Taiwan wrestled with it back in 1988.

How did you propose to meet those goals?

To get universal coverage, the only real way to get there is through mandatory social insurance. You require everyone to be covered and finance it through some equitable means, such as a progressive income tax. If you can't do that, you put together some other form of tax, like a payroll contribution. But then, you want to exempt low-income people from paying the payroll contributions.

Do you think a mandatory requirement to participate -- an individual mandate -- is essential or just optimal?

I'm not aware of any country achieving nearly universal coverage that does not have a mandatory system. There are many people who like to be free riders: When they are sick, they still will go to the hospital emergency room. If they cannot pay, most countries will still take care of the patient. That cost is spread to everybody else. There are usually five to 10 percent of the people with that kind of attitude.

What was the system you recommended for Taiwan?

We recommended decoupling health insurance from employment because that linkage creates so many problems. In Taiwan, residents (anyone who has lived in Taiwan for six months) are enrolled in its national health insurance.

How is the system financed?

Roughly one-third comes from general taxes that subsidize the premium contribution of low-income people, veterans, and farmers. Employers and workers also contribute.

Do people choose insurance plans?

No. People do not have any choice of the basic benefit plan. They can buy insurance to supplement the national health insurance plan. But in Taiwan, the national health insurance plan has such full benefits that not many do. It covers not only medical and physician services but also a large part of dental care, traditional Chinese medicine, prescription drugs and even nurses visiting you at home. The only thing it doesn't cover is long-term care.

How long did it take to act on and implement this overhaul in Taiwan?

In nine months, Taiwan moved from 55 percent insured to 96 percent.

The second goal you mentioned was cost containment. How do cost increases in Taiwan compare to those in the United States?

They have been measurably lower. Taiwan is trying to bend the cost curve by telling the physicians, "You are still paid on a fee-for-service basis, but there's an overall budget." If the expenditures go over that budget, the payment will be reduced.

Taiwan gives the medical profession the power to self-police their members. Every month, Taiwan can develop a pull file for every physician about his or her medical practice so they can see who is abusing the system or who might be committing fraud. Then, the medical society calls these physicians to ask them to explain. Through the peer pressure, right away they were able to curve the physicians' abuses. Hospitals are also paid on a global budget.

What's your assessment of the Affordable Care Act?

I think it's a realistic approach. If you study the history of other countries, you will find most countries first get universal coverage. Then they try to address health care cost inflation. Not many countries can do both in one step.

Let's turn to Vermont. How did you come to be involved with the effort there to think beyond ACA?

A group of people who had heard about my work in Taiwan suggested [me] to the president pro tempore of the Senate, Peter Shumlin, who was planning to run for governor at the time. Shumlin asked me if I [would] be interested in taking on the task. It went through a competitive bidding process, and I got the assignment.

What were Vermont's goals?

One is universal coverage. Two, everyone has to be eligible for a generous benefit package. Three, Vermont wants the financing of such a plan to be progressive. Four, Vermont wants the cost of health care to be contained and to bend the cost curve. And lastly, Vermont wants to move health care to an integrated delivery system that emphasized prevention and primary care.

There were also multiple constraints. The biggest constraint is that all the major players in Vermont (including the state, employers, unions, households) say, "We cannot spend more money for health care. So if single payer is going to cost additional money, then you have to produce a savings and use those savings to pay for it."

The second constraint is that doctors and hospitals say, "We will strongly oppose any reform if we see our net income get reduced." That means the people who receive the payment cannot see a reduction in their net income. A third major constraint is people who have health insurance now said they don't want to see any reduction in their benefits. People in Vermont have very rich benefits that cover maybe 98 percent of their health-care costs.

Those are pretty significant constraints. How does the system that you have proposed for Vermont address them?

We examined different ways to save money through a single-payer system. The obvious savings you can produce through single-payer is by reducing administrative costs. When you move from a multi-insurance plan to a single insurance plan, you can reduce administrative costs.

We also recommended other changes, including a change to a no-fault medical malpractice insurance law. But these are just one-time savings. The real question is how do we bend the cost curve? To do that, we set out to change the payment system. A large number of providers in Vermont are still getting fee-for-service payments. We know the fee-for-service payment method is inflationary, because it tells the providers the more you do, the more you're going to get paid -- regardless if additional services or tests are needed. We also know when you have an integrated delivery system, the cost will be reduced because you can remove the duplication of tests. You can avoid multiple drug prescriptions by different doctors who do not know what other doctors have prescribed.

Could you close by briefly describing how Vermont's system will work, assuming that the state receives the waivers to implement it?

Vermont will use the insurance exchange as the administrative apparatus for a single-payer system. Every Vermonter will be covered under the basic health insurance plan. Residents will then have the choice to buy supplementary insurance. Vermonters will have a choice of providers. By changing the payment methods, by removing the expensive administrative apparatus and by giving incentives for providers to integrate their services, the single-payer approach goes beyond ACA by actually controlling health-care costs.

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